The FAIR site has been redesigned! This page is available for archival purposes only and has not been updated since January 2005. Please update your links. To access the new homepage, go to www.fair.org. You may also wish to visit the advanced search page or the archives page.

Slowing the Stock Market; Social Security Earnings Penalty; Japanese Liberalization

By Dean Baker

"Greenspan Warns of Another Rise in Interest Rates"Richard W. Stevenson
New York Times, February 18, 2000, page A1

This article reports on testimony that Federal Reserve Board Chair Alan Greenspan gave to the House Banking Committee. According to the article, Greenspan indicated his desire to limit the increase in stock prices to the rate of growth of household income. The article does not point out how difficult it would be to do this, given current stock valuations.

Household income is projected to grow at approximately a 5.0 percent nominal rate. The current dividend yield on stocks averages slightly over 1.0 percent. This would make the total return to holding stocks slightly more than 6.0 percent. By contrast, investors can buy government bonds, which are considered much less risky, that pay an interest rate of approximately 6.2 percent. It is unlikely that many people would choose to hold stock, at its current record high price-to-earnings ratios, if they believe that Greenspan will be successful in restricting the growth in stock prices to the rate of growth of disposable income.

"Old-Line Republican Finds an Independent Streak Among the Voters"Jim Yardley and David Firestone
New York Times, February 17, 2000, page A21

This article discusses attitudes among likely voters in the Republican presidential primary in South Carolina. At one point the article discusses Patrick Buchanan's effort to gain support in 1996 with an agenda promoting trade protection. The article notes that there has been considerable foreign investment in South Carolina, then comments, "the factory workers who collected paychecks from foreign corporations like BMW, Michelin and Hitachi concluded that tariffs were not in their best interest."

There is no obvious reason that workers employed by foreign corporations would oppose tariffs. In fact, historically nations have often imposed tariffs as a means of encouraging foreign investment, since foreign companies will find it more profitable to make good domestically than to import them from their home countries. Therefore raising tariff barriers can prompt foreign manufacturers to locate more of their production facilities within the United States.

This article discusses the anticipated battle in Congress over granting China "normal trading relations" status on a permanent basis. This status would position the United States to carry through trade based on the conditions China had agreed to in order to join the WTO.

An one point the article notes the constituencies that stand to gain from this move. It lists farmers, along with several major industries, as among the groups that could reap "huge economic benefits" from China's admission to the WTO. The only way farmers would benefit from China's new status is if its purchases of U.S. exports had the effect of raising the world price of food and other agricultural products. It is questionable whether China's additional purchases as a result of this agreement will be large enough to have a significant effect on world prices. However, if they do lead to significantly higher prices, then the implication is that consumers in the United States stand to pay considerably more for food as a result of this agreement.

This article, on the impact that paying down the government debt is having on financial markets, includes several inaccurate statements. It notes that the lower supply of long-term Treasury bonds, which is the result of paying down the debt, has reduced interest rates on these bonds. It then asserts that this decline in Treasury bond interest rates is "throwing sand into the gears" of the Federal Reserve Board's efforts to slow the economy by raising interest rates.

Actually, the decline in interest rates on Treasury bonds may have little effect on rest of the economy, as a result of an increasing divergence between the interest rate on Treasury bonds and other debt issues. Ordinarily, the interest rates on other types of debt, such as mortgages and corporate bonds, move in step with the interest rate on Treasury bonds. The fact that the government is paying down the debt has created somewhat of a shortage of Treasury bonds, causing the interest rate on Treasury bonds to decline, but leading to no comparable decline in interest rates on private debt issues. It is only the latter that matter for the economy. The decline in interest rates on Treasury bonds will only affect the economy insofar as other interest rates may be contractually tied to the interest rates on Treasury bonds.

The article also states that in spite of the surplus, "the government will still issue debt to be held by the Federal Reserve Board and the Social Security trust." While the government will be issuing debt to be held by the Social Security trust, the debt held by the Federal Reserve Board is publicly issued debt that the Fed has bought in order to pump reserves into the banking system. The method through which the Federal Reserve Board will control the money supply is one of the problems that will have to be addressed if the government actually paid off its entire debt. The currency held by the public is also a component of the government debt. If the debt is literally paid off in full, this means that the government will take possession of all outstanding U.S. currency.

The last paragraph of the article includes a quote from Robert H. Parks, a finance professor at Pace University, who asserts that paying down the debt increases the money supply and therefore can cause inflation. Paying down the debt does not directly affect the money supply.

This article reports on the opposition of many liberals to President Clinton's intention to pay down the national debt rather than increase social spending and public investment in areas such as health care and education. It comments that liberals complain that "Clinton and Vice President Gore now burn for something they never mentioned in their 1992 and 1996 campaigns: not merely reducing the federal debt but eliminating it by 2013."

This actually understates the extent of the shift in the Clinton administration's agenda from its 1992 campaign, when Clinton and Gore didn't mention paying down the debt at all. President Clinton's target in the 1992 campaign was to cut the size of the annual deficit in half by 1996. This would mean that the national debt would continue to grow, just as at a slower rate. While many politicians advocated balancing the budget, there were very few serious political figures who argued for paying down the national debt at that time.

The article also includes assertions from Clinton administration officials that reducing the debt is leading to lower interest rates and an investment boom. This claim is contradicted by the evidence. Real interest rates (the nominal interest rate minus the inflation rate) are approximately the same now as they were at the peak of the last business cycle, when the nation was still running large deficits. The interest rate on 30-year government bonds is currently around 6.3 percent, while the inflation rate has been about 2.0 percent over the last year, which makes the real interest rate 4.3 percent. In 1989 the nominal interest rate on thirty year bonds was 8.5 percent, while the inflation rate was 4.5 percent, leading to a 4.0 percent real interest rate.

The share of GDP going to investment (both foreign and domestic) has not increased in this period. In 1989, at the peak of the last business cycle, 11.2 percent of GDP was going to domestic investment. This had risen to 12.6 percent in 1999, but the trade deficit, which is effectively negative foreign investment, has risen from 1.2 percent of GDP to 2.8 percent in 1999. This means that the total share of GDP going to investment has actually fallen slightly over this decade, from approximately 10.0 to 9.8 percent. Since the trade deficit has risen rapidly in 1999, the share of GDP going to investment had fallen to 9.4 percent by the last quarter of 1999.

"Call to Halt Penalty for Social Security Recipients Who Work"Richard W. Stevenson
New York Times, February 15, 2000

These articles discuss a new bill before Congress that would eliminate the earnings penalty for Social Security beneficiaries between age 65 and 69. Under the current law, beneficiaries in this age group lose one dollar for every three they earn over $17,000. The Post article asserts that 700,000 beneficiaries currently lose some of their benefits under this law. (The Times article places the number at 800,000.)

These articles do not note that the $17,000 earnings cap is already scheduled to rise to $30,000 in 2002, and to rise in step with average wage growth in subsequent years. The vast majority of those who pay the penalty at present would not pay it after 2002, since only a tiny minority of older workers earn more than $30,000 a year.

This article discusses a proposal by President Clinton to spend $20 million dollars to study ways in which the Family and Medical Leave Act can be expanded to cover more workers. At one point the article asserts that the Act " has allowed more than 20 million Americans to take up to a dozen weeks of unpaid leave to care for a newborn child or deal with a medical crisis at home."

This figure refers to the number of people who have actually taken a leave since the Act's passage. Many companies already had leave policies in place prior to the passage of the law in 1993. The additional number of workers that have been able to take a leave as a result of the Act would be far less 20 million.

"A Politician Sees Future of Japan in Its Past"Howard W. French
New York Times, February 13, 2000, Section 1, Page 5

This article discusses the role of Shizuka Kamei, a high official in the ruling Liberal Democratic Party, in resisting the market liberalization measures being pushed by others in the party and the government. At one point the article questions whether Mr. Kamei is "trying to steer Japan into the present century or back in the past."

It is worth noting that Japan had experienced 40 years of extraordinary economic growth, leading to enormous improvements in living standards for its population, under the sort of policies advocated by Mr. Kamei. From 1960 to 1994, Japan's per capita GDP growth averaged 4.7 percent a year. No nation has ever sustained per capita GDP growth of even half this rate by following the policies that this article views as the future.

Later, the article questions Mr. Kamei's professed commitment to protecting ordinary Japanese citizens, noting that many view him as "driven not so much by principle as political and financial calculations." As Mr. Kamei is a successful politician, it is reasonable to believe that his actions are guided by political and financial calculations. It is also reasonable to assume that the politicians who are pushing the liberalization agenda opposed by Mr. Kamei are driven by political and financial calculations as well.

"Hostile Takeover Bid in Japan Ends on an Educational Note"Stephanie Strom
New York Times, February 15, 2000

This article reports on the first major attempt at a hostile corporate take-over in Japan. The article notes the obstacles that arose to block the effort, in particular the system of interlocking firms, or keiretsu, which can make it very difficult for an outsider to seize control. The article asserts that this system is a "significant contributor to Japan's lack of global competitiveness."

The article does not indicate what criteria it is using to measure competitiveness. It is worth noting that Japan has a balance of trade surplus that is close to 2.0 percent of its GDP, meaning that it exports far more to foreigners than it buys from abroad. By contrast, the United States had a trade deficit that was more than 3.0 percent of GDP in the fourth quarter of 1999. By this market-based measure of competitiveness, Japan is far more competitive globally than the United States.

This article examines the current economic situation in Japan. It notes that the stock market is continuing to rise, driven primarily by high-tech companies, while the economy seems to be sinking back into a recession. At one point the article asserts that the Japanese central bank has limited ability to stimulate the economy because interest rates have already fallen almost to zero.

According to standard economic theory, the nominal interest rate is irrelevant to economic activity. It is the real interest rate, the difference between the nominal interest rate and the inflation rate, that affects economic activity. The Japanese central bank could attempt to reduce the real interest rate further by deliberately inducing modest levels of inflation, as advocated by M.I.T. economist Paul Krugman (see "Japan's Trap." May, 1998, http://web.mit.edu/krugman/www/japtrap.html). Even though Japan's nominal interest has moved close to zero, because it has a falling price level, its real interest rate is still somewhat higher than it was in the United States when the U.S. was recovering from its last recession in 1992-1993.

It is worth noting that Japan's political leaders have advocated more expansionary monetary policy, along the lines recommended by Krugman. However, its central bank was recently made independent of the government. The bank apparently refuses to consider more expansionary policies for reasons that have no obvious economic justification.

This article reports that many rich people in Brazil are now using helicopters to avoid both traffic jams and the risk of carjacking and kidnapping. The article comments that the mass use of helicopters by the rich is the result of the government's neglect of transportation needs and the nation's extremely unequal distribution of wealth. At one point it refers to World Bank data that shows the richest 1 percent of the population control more than 50 percent of the wealth, while the poorest 10 percent control less than 1 percent.

It is worth noting that the latest data from the Federal Reserve Board shows the distribution of wealth in the United States to be almost as unequal, with the top 1 percent controlling more than 40 percent of the nation's wealth and the bottom 10 percent to be net debtors.

This article reports on AOL's change of position on requiring that cable operating systems allow open access to Internet service providers on high-speed links. According to the article, AOL had been actively lobbying legislators at all levels of government to require cable companies to allow Internet providers equal access on these systems. However, since AOL arranged to merge with Time-Warner, which provides cable access to 20 million households, it has stopped pressing for open access.

"As Mergers Multiply, So Does the Danger"Louis Uchitelle
New York Times, February 13, 2000, Section 3, page 4

This article examines the factors that have led to the recent wave of mergers in the United States and around the world.

Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.